With global oil and gas prices rising, Russia is once again at the forefront of global investment opportunities in energy. By some estimates, the country has between 60 and 200 billion barrels of oil and over 1,500 trillion cubic feet of gas. The challenge for any foreign energy company is that recent announcements made by the Putin administration have added new complexities and uncertainty surrounding investing in Russia’s energy sector. Companies that have yet to invest in Russia may want to rethink their strategy and apply what Deloitte Research calls a strategic flexibility framework for mitigating risk in uncertain markets.
When using traditional scenario planning techniques, a company defines a set of future scenarios and adopts a core strategy that has wide applicability. The company holds off investing until it receives one or more clear signals that indicate whether a particular scenario is unfolding. Strategic Flexibility differs from this approach in that it relies on real options theory where the company can make limited investments in assets with the provision for increasing or decreasing the level of commitment, in much the same way as an investor who holds financial options. By applying the principles of Strategic Flexibility, investors can develop a strategy for managing risks and avoiding surprises.